AT&T’s Stock Drop Defies Trend, While DirecTV’s Shows Uncertainty

Shares of both AT&T Inc. and DirecTV are down Monday morning, in the first indication of how investors view their $49 billion mega-deal.

From AT&T’s perspective, it used to be commonplace for companies to experience such declines after they announced a big acquisition. But that’s not always the case any more. In the past 18 months, several notable transactions saw shares of the acquiring companies jump on the announcement of the deal.

And on the DirecTV side, today’s decline means the stock moved further away from the price that AT&T agreed to pay. Shares were recently trading at $84.62, off 1.8%, after AT&T said it would pay $95 per share in stock and cash.

That 11% spread suggests DirecTV investors view the deal as being far from certain. The regulatory approval process is expected to be long and arduous, though several analysts are saying this morning it will ultimately be successful. The deal also includes an unusual out: AT&T Inc can pull out of the merger if DirecTV is unable to strike a deal with the National Football League to renew its popular NFL Sunday Ticket package.

As for AT&T, the Journal wrote in March about the trend of shares of acquiring companies rising that included some recent When Men's Wearhouse Inc. clinched a long-sought deal to buy rival Jos. A. Bank Clothiers Inc. for $1.8 billion, Men’s Wearhouse stock rose almost 5%. And when computer-security firm FireEye Inc. announced in January it had bought Mandiant Corp., FireEye’s stock shot up 39%.

One reason for this trend is with margins pushed to limits and the economy still muddling along, companies have few option for growth but acquisitions. And Investors are rewarding those companies for taking that risk. Investors also see less downside to deals. Transactions nowadays are more likely to generate significant cost savings from the elimination of overlapping jobs and infrastructure. And low interest rates mean transactions can be funded cheaply, often immediately boosting profits rather than taking years to do so.

In the just announced deal with DirecTV, AT&T promised that the transaction would be accretive to earnings within 12 months and said cost synergies are expected to exceed $1.6 billion annually by three years after the deal closes.

Yet AT&T shares were down 1.8% to $36.07 after the first hour of trading Monday.

Part of the reason, no doubt: AT&T is funding about two-thirds of the deal with stock, which means existing shareholders will see their ownership of the company diluted. When all is said and done, DirecTV shareholders would own between 14.5% and 15.8% of AT&T shares on a fully-diluted basis. The use of stock has been of added interest in this transaction, since increasing the number of outstanding shares would also increase the company’s already sizable dividend obligations.

Granted, that still leaves the stock up about 10% since the Journal first reported that the two companies were in talks. But several other instances of post-announcement stock increases have also come despite plenty of advance word that a deal was looming–most notably with the lengthy wrangling over the Men’s Wearhouse-Jos. A. Bank deal.

In the Men’s Wearhouse case, the nearly 5% stock increase meant shares rose a grand total of 62% in the time between when the possibility of a combination between the two suit retailers surfaced publicly last October and the day after the deal was announced in March.

But one notable exception to the recent trend is the one that’s drawing the most comparisons to today’s deal: shares of Comcast Corp. dropped 4% on the day in February when the company announced its surprise $45 billion acquisition of Time Warner Cable Inc.